CIS 5.3 Derivative exposure
Application
This section (CIS 5.3) applies to authorised fund managers of UCITS schemes except CIS 5.3.4 R, which applies to:
- (1)
ICVCs which are UCITS schemes; and
- (2)
to trustees of AUTs in respect of UCITS schemes.
Introduction
- (1)
A scheme may invest in derivatives and forward transactions as long as the exposure to which the scheme is committed by that transaction itself is suitably covered from within its scheme property. Exposure will include any initial outlay in respect of that transaction.
- (2)
Cover ensures that a scheme is not exposed to the risk of loss of property, including money, to an extent greater than the net value of the scheme property. Therefore, a scheme must hold scheme property sufficient in value or amount to match the exposure arising from a derivative obligation to which the scheme is committed. CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions) sets out detailed requirements for cover of a scheme.
- (3)
In applying this section (CIS 5.3), it may help to regard a future as an obligation to which the scheme is committed (in that, unless closed out, the future will require something to be delivered, or accepted and paid for); a written option as an obligation to which the scheme is committed (in that it gives the right of potential exercise to another thereby creating exposure); and a bought option as a right (in that the purchaser can, but need not, exercise the right to require the writer to deliver and accept and pay for something).
- (4)
In accordance with CIS 5.2.7 R (2)(b)(Chapter to be construed as a whole), cover used in respect of one transaction in derivatives or forward transaction must not be used for cover in respect of another transaction in derivatives or a forward transaction.
- (5)
CIS 5.3.3 R - CIS 5.3.5 Rsets out requirements for "cover" of a UCITS scheme in respect of derivative transactions.
Cover for transactions in derivatives and forward transactions
- (1)
A transaction in derivatives or forward transaction is to be entered into only if the maximum exposure, in terms of the principal or notional principal created by the transaction to which the scheme is or may be committed by another person is covered globally under (2).
- (2)
Exposure is covered globally if adequate cover from within the scheme property is available to meet the scheme's total exposure, taking into account the value of the underlying assets, any reasonably foreseeable market movement, counterparty risk, and the time available to liquidate any positions.
- (3)
Cash not yet received into the scheme property but due to be received within one month is available as cover for the purposes of (2).
- (4)
Property the subject of a transaction under CIS 5.4 (Stock lending) is only available for cover if the authorised fund manager has taken reasonable care to determine that it is obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.
- (5)
The global3 exposure relating to derivatives held in a UCITS scheme may not exceed the net value of the scheme property2(Article 2(1) of the Commission Recommendation 2004/383/EC)3.
3
Borrowing
- (1)
Cash obtained from borrowing, and borrowing which the authorised fund manager reasonably regards as an eligible institution or an approved bank to be committed to provide, are not available for cover under CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions), save in compliance with (2).
- (2)
Where, for the purposes of this section (CIS 5.3), the ICVC or the trustee for the account of the AUT on the instructions of the manager:
- (a)
borrows an amount of currency from an eligible institution or an approved bank; and
- (b)
keeps an amount in another currency, at least equal to the borrowing for the time being in (a), on deposit with the lender (or his agent or nominee);
this section applies as if the borrowed currency, and not the deposited currency, were part of the scheme property.1
- (a)
Continuing nature of limits and requirements
An authorised fund manager must (as frequently as necessary), re-calculate the amount of cover required in respect of derivatives and forward positions already in existence under this section (CIS 5.3). Derivatives and rights under forward transactions under this section may be retained in the scheme property only so long as they remain covered globally under CIS 5.3.3 R (Cover for transactions in derivatives and forward transactions).